Your friends at #iPhone made a major breakthrough this morning.
we got a serial console working, here is how
the serial has the same pinouts as iPod serial
use a 6.8kish resistor from pin 21 to gnd
tie pin 11-sergnd to the real ground
use iphoneinterface to send the following commands in recovery mode:
setenv debug-uarts 1
saveenv
reboot
that should work

IT GIVES YOU A FULL INTERACTIVE SHELL
I REPEAT, A FULL INTERACTIVE SHELL

If you haven't been following the shabang, we finally have full access to the filesystem . The sandbox is broken, and it turns out it's just a few config files INSIDE the sandbox that you can change to break out.

Instructions are

Breaking out of chroot jail

Okay in normal mode files are accessed using afc.
You'll need to change Services.plist and fstab

Add two more params to afcd, "-d", and "/"
Change the fstab to mount /dev/disk0s1 rw

Upload these two files to the sandbox
Enter recovery with the button combo
Type "grestore" in the recovery shell

Wow! Now we can finally customize those boring, tired, so-last-month-looking program icons on our nearly 2 week old iPhones!! Actually I love the icons but I would LOVE to add some new ringtones and maybe add a custom icon or two to the homepage.

"FWIW
I've been told by a friend at Apple, the serial interface rumor is just a rumor. He said, "we have been watching the forums and find a lot of the information amusing!"

He went on to tell me that to really achieve any functionality you will need leopard. I don't know if he fed me a line of bull or not, but he's always been truthful with me in the past. He also said to be careful with the resistor because it is the wrong resistance and it may cause a problem."

[I had a link here] he took the movie down, it was nice to see this in action.

The price to pay for his method though is you can't sync anymore.

Someone else got it working with an mp3 tonight too.

I'm no programmer I just spent a couple of hours listening. I guess we are all just waiting on the newer iPhoneInterface program to hit the SVN. It was very entertaining to listen to those who were the active members in the project strategize about what they had to do tomorrow, including returning their iPhone for a new one to get a virgin dump of the flash.